F 

154,5 


BANCROFT    LIBRARY 


The  Panama  Canal 
as  a  Business  Venture 


By 

GEORGE   L.  FOX 

Author  of 

"  President  Roosevelt's  Coup  d'Etat— The 
Panama  Affair  in  a  Nutshell" 


PRICE   TEN   CENTS 


New  Haven,  Connecticut 


The  Panama  Canal 
as  a  Business  Venture 


By 

GEORGE  L^/FOX 


Author  of 

President  Roosevelt's  Coup  d'Etat  —  The 
Panama  Affair  in  a  Nutshell  " 


NEW  HAVEN,  CONNECTICUT 


PRESS  OP 

MURRAY  AND  EMERY  COMPANY 
BOSTON 


Bancroft  Library 


THE  PANAMA  CANAL  AS  A 
BUSINESS  VENTURE 

BY  GEORGE   L.   FOX 

Author  of  "President  Roosevelt's  Coup  d'Etat —  The  Panama  Affair  in  a  Nutshell" 

SINCE  the  time  when  President  Roosevelt,  to  use  the  words  of 
Justice  Brewer,  "rode  rough  shod  over  the  rights  of  Colum- 
bia," it  is  remarkable  to  see  how  little  attention  is  paid  by 
the  President  or  Congress  to  the  important  question  of  ultimate 
cost  and  probable  financial  return  of  the  Panama  Canal.    The 
famous  profane  exclamation,  "Damn  the  expense,"  voices  the 
feelings  of  many,  even  of  such  a  character  as  President  Taft.     The 
thought  of  a  carefully  prepared  balance  sheet  is  laughed  at,  and  the 
money  of  the  taxpayers  is  snovelled  into  a  bottomless  pit  with  the  same 
lavishness  that  prompted  Daniel  Webster  in  his  speech  after  a  banquet 
to  offer  to  pay  the  national  debt  out  of  his  own  impecunious  pocket. 

Congressman  Gillett,  of  Massachusetts,  a  member  of  the  Committee 
on  Appropriations,  in  discussing  national  expenditure  recently  uttered 
the  following  sensible  words: 

"  To  me  one  of  the  most  alarming  tendencies  of  the  time  is  the  alacrity 
with  which  Congress  appropriates  money  for  any  purpose,  and  the 
indifference  of  the  people  to  huge  expenditures.  Taxation  is  so  indirect, 
its  burdens  are  so  little  appreciated,  that  any  section  of  the  country 
feels  that  whatever  it  receives  from  the  nation  is  clear  gain,  and  con- 
sequently there  is  apt  to  be  no  sense  of  responsibility  in  making  appro- 
priations, no  selfish  interest  on  the  side  of  economy.  ' 

One  of  Mr.  Gladstone's  most  famous  colleagues  speaks  with  reverence 
of  the  fact  that  the  great  leader  seemed  to  be  more  careful  in  spending 
the  public  money  than  if  it  were  his  own.  This  is  a  very  rare  and  com- 
mendable virtue,  which  our  public  men  need  at  the  present  time.  In 
such  a  spirit  will  be  discussed  herewith  the  following  important  questions, 
which  nave  never  received  any  attention  in  President  Roosevelt's 
messages  on  the  subject: 

1.  What  will  be  the  final  cost  of  the  canal? 

2.  What  will  be  the  probable  income  after  the  canal  is  built  ? 

3.  What  will  be  the  fixed  charge  each  year  upon  the  United  States 
Treasury,  if  it  is  opened  for  traffic  in  1920,  and  the  thirty-year  bonds 
begin  to  be  redeemed  in  annual  instalments  at  that  time  ? 

4.  What  will  be  the  economic  benefit  in  lessening  the  cost  of  transit 
of  low-grade  freight,  such  as  coal,  ores,  metals,  sugar,  grain  and  lumber, 


THE  PANAMA  CANAL  AS  A  BUSINESS  VENTURE 

between  the  two  oceans  through  the  canal  as  compared  with  the  cost 
by  the  Panama  Railroad,  equipped  throughout  in  the  best  possible 
way  and  furnished  with  the  best  possible  terminal  facilities,  like  the 
Tehuantepec  Railroad  across  Mexico? 

I 

What  will  be  the  Probable  Outgo? 

The  estimated  cost  of  the  enterprise  has  steadily  increased  in  arith- 
metical progression  since  DeLesseps  floated  his  scheme  in  1880.  The 
first  contract  provided  that  a  tide-water  canal  was  to  cost  at  the  outside 
limit  $102,400,000.00.  When  the  French  company  sold  out  to  the 
United  States  it  is  estimated  that  $250,000,000.00  had  been  expended. 
The  Canal  Commission  by  adroit  manceuvering  got  the  residuum  of  this 
expenditure  for  about  one-sixth  of  this  sum,  viz.,  $40,000,000.00.  The 
Walker  Inter-Oceanic  Canal  Commission  in  its  report  of  1901,  on  page 
261,  gives  the  estimated  cost  at  $144,233,358.00,  not  reckoning  interest 
on  investment  during  time  of  construction,  in  addition  to  the  sum  paid 
the  French  company  on  its  property  and  rights,  and  to  Panama,  making 
a  total  of  $194,233,356.00  as  the  total  estimate. 

The  actual  expenditure  of  money  from  the  United  States  Treasury 
for  the  building  of  the  canal,  including  the  appropriation  to  July  1,  1908, 
amounts  in  round  numbers  to  $130,000,000.00,  of  which  $50,000,000.00 
was  paid  to  the  French  company  and  the  Republic  of  Panama.  This 
leaves  $80,000,000.00  spent  in  actual  construction  of  the  canal. 

In  the  Canal  Record  for  September  16,  1908,  the  official  tabulated 
statement  of  expenditures  to  July  31,  1908,  puts  the  total  amount  at 
$78,470,750.28.  This  does  not  include  certain  additional  disbursements 
which  cannot  yet  be  classified. 

If  we  add  together  the  actual  expenditure  of  the  French  companies 
and  of  the  United  States  Government,  the  total  expenditure  for  the 
building  of  the  canal  thus  far  will  amount  to  $330,000,000.00.  The 
final  cost  of  the  Suez  and  the  Manchester  ship  canals  was  two  and  one- 
half  times  the  original  estimates.  It  will  be  seen  in  the  case  of  Panama 
that  such  a  point  has  been  reached,  when  hardly  one-fourth  of  the 
excavation  work  has  been  done,  and  practically  none  of  the  construction 
work  been  accomplished. 

In  order  to  get  an  approximate  answer  to  the  question  of  final  cost 
two  methods  of  computation  will  be  adopted,  such  as  will  seem  to  the 
average  man  just  and  reasonable. 

The  first  method  will  be  to  multiply  the  average  annual  expenditure 
by  the  number  of  years  to  elapse  before  the  canal  is  finished,  and  reckon 
in  interest  compounded  from  the  time  the  money  leaves  the  treasury  and 
is  sunk  forever  in  the  canal,  to  the  estimated  time  of  opening  the  canal 
for  traffic. 


THE  PANAMA  CANAL  AS  A  BUSINESS  VENTURE 

The  second  method  will  be  to  find  what  portion  of  the  work  has  al- 
ready been  accomplished,  and  at  what  cost.  Then  to  estimate  the  final 
cost  on  the  supposition  that  the  rate  of  cost  and  expenditure  will  be  the 
same  in  the  future  as  in  the  past  will  be  a  simple  process  of  multiplication. 

In  applying  the  first  method  I  find  that  by  July  1,  1908,  the  sum 
of  $130,000,000.00  had  been  expended  by  the  United  States,  and 
that  the  yearly  expenditure  for  twelve  years  will  be  $30,000,000.00  a 
year.  On  this  basis,  then,  if  compound  interest  be  reckoned  at  two 
per  cent  annually,  the  result  will  be  seen  in  the  following  table: 

Principal  Time  Amount 

$130,000,000.00  12  years  $164,871,200.00 

30,000,000.00  12  years  38,047,200.00 

30,000,000.00  11  years  37,301,100.00 

30,000,000.00  10  years  36,569,700.00 

30,000,000.00  9  years  35,852,700.00 

30,000,000.00  8  years  35,149,800.00 

30,000,000.00  7  years  34,460,700.00 

30,000,000.00  6  years  33,784,800.00 

30,000,000.00  5  years  33,122,400.00 

30,000,000.00  4  years  32,472,900.00 

30,000,000.00  3  years  31,836,300.00 

30,000,000.00  2  years  31,212,000.00 

30,000,000.00  1  year  30,600,000.00 

$490,000,000.00  $575,280,800.00 

It  will  be  seen  from  this  computation  that  the  ultimate  cost  is  likely 
to  approach  in  round  numbers,  six  hundred  million  dollars.  The  ele- 
ments of  uncertainty  in  this  computation  are  the  size  of  the  annual 
appropriation,  the  rate  of  interest  and  the  time.  The  appropriation 
for  the  fiscal  year  ending  July  1,  1908,  is  $40,000,000.00.  It  does  not 
seem  probable  that  the  United  States  can  continue  to  borrow  at  so  low 
a  rate  as  two  per  cent,  when  the  bonds  are  no  longer  in  demand  as  a 
basis  for  bank-note  circulation.  If  the  canal  should  be  completed  in  less 
than  twelve  years,  it  is  safe  to  say  that  there  will  be  no  saving  of  ex- 
pense less  than  these  figures,  as  any  saving  of  time  would  be  made  up 
by  increased  annual  expenditures.  When  the  enormous  construction 
work  is  added  to  the  enormous  excavation  work,  the  annual  expendi- 
ture may  rise  to  fifty  or  sixty  millions. 

In  making  an  estimate  of  cost  according  to  the  second  method  pro- 
posed, it  is  difficult  to  determine  approximately  what  portion  of  the 
work  has  already  been  done  and  at  what  cost,  so  as  to  compute  the  final 
cost  of  the  whole.  Clearly  the  work  can  be  divided  into  two  parts,  viz., 
the  cost  of  excavation  and  the  cost  of  construction  of  dams,  retaining 
walls,  locks,  etc.,  with  proper  facilities  in  the  shape  of  harbors  and 


THE  PANAMA  CANAL  AS  A  BUSINESS  VENTURE 

docks.  Very  little  actual  construction  work  has  been  accomplished. 
Mr.  Lindon  W.  Bates,  one  of  the  best  equipped  and  most  expert  writers 
on  the  canal,  asserts  that  five  per  cent  of  the  necessary  material  to 
be  moved  and  placed  has  been  moved  and  placed.  Since  this  state- 
ment was  printed,  thirty-five  million  cubic  yards  have  been  removed. 
Let  us  for  the  sake  of  argument  assume  that  Dr.  Bates  is  wide  of  the 
mark  in  his  estimate,  and  that  instead  of  one  twentieth,  one  fifth  of  the 
material  to  be  moved  and  placed  has  been  moved  and  placed. 

The  World's  Work  for  June,  1908,  apparently  from  official  figures, 
prints  a  diagram  showing  that  less  than  one  fourth  of  the  excavation  has 
thus  far  been  accomplished.  As  the  cost  of  excavation  will  increase 
with  increase  in  depth,  and  the  cost  per  cubic  yard  of  the  enormous 
construction  work  will  equal  or  exceed  the  cost  per  cubic  yard  of  exca- 
vation and  dredging,  an  estimate  that  one  fifth  of  the  entire  work  to 
be  done,  based  on  the  same  unit  of  cost,  has  been  executed  seems  not  un- 
reasonable. On  this  basis,  then,  it  will  cost  five  times  as  much  to  com- 
plete the  work,  provided  in  the  future  the  cost  remains  the  same  in  pro- 
portion as  it  has  been  in  the  past.  This  seems  reasonable  to  expect,  as 
twice  to  three  times  as  many  men  are  employed  as  under  the  French 
regime,  the  rate  of  wages  is  much  higher,  and  the  cost  of  materials  will 
be  determined  by  the  extreme  standards  of  a  highly  protected  country. 

The  question  now  to  be  considered  is  what  amount  of  money  is  to 
be  taken  as  the  previous  cost  which  is  to  be  the  multiplicand  for  the 
multiplier  that  we  have  selected.  Obviously  as  much  of  the  French 
expenditure  was  wasted,  it  would  not  be  fair  to  take  the  whole  sum  of 
$250,000,000.  Let  us  strike  off  $30,000,000,  add  $80,000,000  expended 
by  the  United  States,  and  take  $300,000,000.00  as  the  multiplicand. 
On  this  basis,  then,  the  product  for  the  total  cost  of  the  enterprise  will 
be  one  and  a  half  billions  of  dollars.  It  is  estimated  that  the  cost  to 
the  United  States,  by  July  1,  1908,  has  been  $130,000,000.00.  On  the 
supposition  that  $30,000,000.00  of  this  has  been  used  for  sanitation, 
right  of  way  and  equipment,  which  will  not  have  to  be  duplicated,  let 
us  strike  on  that  sum  and  call  our  minimum  multiplicand  $100,000,000. 
On  this  basis  the  minimum  product  giving  the  total  cost  of  the  canal  will 
be  half  a  billion  of  dollars.  It  seems  erroneous,  however,  to  make  this 
last  computation  on  the  bargain  price  paid  by  the  United  States  for  the 
unfinished  canal,  as  that  sum  does  not  represent  the  actual  cost  of  the 
unfinished  work,  or  what  it  would  cost  the  United  States  to  do  what  the 
French  did,  if  the  United  States  Government  were  now  turning  the 
first  spade  in  the  enterprise.  It  may  fairly  be  concluded  that  the  final 
cost  will  much  exceed  naif  a  billion  of  dollars. 

In  December,  1903,  the  public  mind  and  conscience  seemed  strangely 
incapable  of  judging  fairly  either  of  the  discreditable  diplomacy  by 
which  the  United  States  extended  its  sovereignty  over  the  Canal  zone, 

6 


THE  PANAMA  CANAL  AS  A  BUSINESS  VENTURE 

or  the  expediency  of  the  whole  enterprise  as  a  commercial  project. 
But  the  lapse  of  five  years  has  brought  a  tremendous  sobering  of  the 
public  judgment,  a  partial  awakening  from  the  delirium  of  Oriental 
empire  and  a  dispelling  of  the  glamor  that  dimmed  the  public  vision. 
As  the  average  man  can  see  more  clearly  now,  Webster's  so-called 
miserable  interrogatory  "What  is  all  this  worth?"  should  be  pushed  to 
the  heart  of  the  matter,  and  we  may  next  consider  what  will  be  the  finan- 
cial return  of  this  enormous  expenditure  of  the  money  of  the  taxpayers 
of  the  United  States. 

What  will  be  the  Probable  Income? 

This  question  naturally  divides  itself  into  two  parts,  viz.,  (1)  What 
will  be  the  gross  income,  derived  from  ships  passing  through  the  canal  ? 
(2)  What  will  be  the  net  income  per  year,  after  the  costs  of  maintenance 
and  operation  have  been  paid? 

While  it  was  difficult  to  get  a  safe  approximate  answer  to  the  inquiry 
about  the  cost  of  the  canal,  it  is  clearly  far  more  difficult  to  answer  this 
second  question.  Still  it  must  be  attempted,  using  the  best  authorities 
to  throw  light  on  the  subject.  The  three  experts  whose  testimony  I 
shall  review  are  Joseph  Nimmo,  formerly  Chief  of  the  Bureau  of  Statis- 
tics at  Washington;  Col.  George  E.  Church  of  London,  a  leading  ex- 
plorer and  authority  on  South  America,  and  Prof.  Emory  R.  Johnson, 
of  the  University  of  Pennsylvania,  the  official  statistician  of  the  Walker 
Panama  Commission. 

Mr.  Nimmo,  while  in  office,  in  1880,  with  the  help  of  Colonel  Church, 
made  to  the  Treasury  Department  on  August  7,  1880,  an  exhaustive 
report.  It  is  entitled  "The  Proposed  American  Inter-Oceanic  Canal 
in  its  Commercial  Aspects,"  and  is  published  in  the  Quarterly  Report 
of  the  Chief  of  the  Bureau  of  Statistics,  No.  1,  1879-1880,  pp.  281-418. 
This  is  a  most  scientific  treatment  of  the  question  and  contains  ninety 
pages  of  valuable  appendices.  Twice  since  that  time,  in  1898  and  in 
1899,  he  has  published  articles  revising  his  estimates.  Mr.  Nimmo  has 
had  the  experience  of  a  veritable  Cassandra.  His  able  arguments  have 
been  entirely  unheeded  either  by  Government  authorities  or  the  general 
public,  and  I  have  found  no  reference  to  him  or  his  report  in  the  volum- 
inous report  on  the  industrial  and  commercial  value  of  the  canal,  by 
Professor  Johnson,  the  official  statistician  of  the  commission.  In  his 
report  Mr.  Nimmo  considers  at  length  the  amount  of  shipping  tonnage, 
the  value  of  commodities,  and  the  proportion  of  the  commerce  of  the 
principal  nations,  which  might  have  passed  through  the  canal,  if  open 
at  the  time,  and  the  various  geographical  and  nautical  conditions  which 
control  the  amount  of  shipping  and  bear  upon  the  future  development 
of  such  commerce.  Of  his  conclusions,  which  he  summarizes,  the 
following  are  the  most  important. 


The  probable  tonnage  for  the  canal  would  amount  to  about  one 
million  three  hundred  and  twenty-five  thousand  tons  annually,  the 
traffic  would  be  confined  to  steam  vessels,  the  trade  around  the  Horn  and 
across  the  Isthmus  had  been  enormously  diverted  by  one  trans-conti- 
nental railroad,  very  little  traffic  for  Australia  through  the  canal  could 
be  expected  from  either  Europe  or  America,  and  the  magnitude  of  the 
commerce  of  the  countries  on  the  western  coast  of  South  America  is 
very  limited  by  natural  conditions.  In  his  pamphlet  published  in  1898 
he  revises  his  estimate  made  in  1880,  of  possible  tonnage  per  year  for 
the  canal,  from  one  million  six  hundred  and  twenty-five  thousand  tons 
annually  to  three  hundred  thousand  because  of  the  great  reduction  in 
trans-continental  rates  and  changed  conditions.  In  1899  in  his  article 
he  says,  "  I  conclude  that  not  more  than  four  hundred  thousand  tons  of 
shipping  annually  can  be  confidently  expected  to  pass  through  such 
canal." 

Colonel  George  E.  Church,  whose  estimate  I  shall  next  quote,  is  the 
greatest  living  authority  on  the  geography  of  South  America,  and  con- 
tributed one  of  the  most  important  appendices  to  Mr.  Nimmo's  report, 
No.  60,  on  the  relation  of  the  west  coast  of  South  America  to  the  pro- 
posed canal.  His  most  complete  discussion  of  the  subject  is  found  in 
an  article  entitled  "  Interoceanic  Communication  on  the  Western  Con- 
tinent" in  The  Geographical  Journal,  published  in  London,  by  the 
Royal  Geographical  Society,  March,  1902. 

As  no  one  of  the  many  advocates  of  the  commercial  value  of  the 
Panama  Canal  has  ever  seriously  attempted  to  answer  or  criticize  the 
soundness  of  Colonel  Church's  article,  it  is  fair  to  assume  that  his  posi- 
tion, his  reasoning  and  his  conclusions  are  difficult  to  controvert  or 
overthrow. 

The  most  prominent  points  which  he  makes  in  this  article  are  as 
follows.  He  explodes  the  fallacy  of  the  Suez  Canal  analogy,  by  showing 
that  ninety-four  per  cent  of  the  world  live  in  countries  to  the  north  of 
Panama  and  six  per  cent  south  of  it,  whereas  the  parallel  of  latitude  of 
Suez  cuts  through  or  runs  in  the  neighborhood  of  the  densest  area  of 
population  of  our  globe. 

He  then  by  careful  analysis  eliminates  from  the  influence  of  the 
Panama  Canal  the  whole  inter-trade  of  by  far  the  greater  part  of  the 
land  surface  and  over  nine-tenths  of  the  population  of  the  globe.  His 
conclusion  is  that  there  is  likely  to  be  one  million  eight  hundred  thou- 
sand cargo  tons  of  freight  to  go  through  the  canal.  Now  comes  one  of 
the  most  difficult  factors  in  the  computation,  viz.,  how  to  transmute 
cargo  tons  of  weight  into  net  register  tons  of  capacity.  Colonel  Church 
adopts  as  a  fair  rule  that  every  net  register  ton  of  steamships  will  absorb 
on  the  average  two  cargo  tons  of  freight.  On  this  basis  he  gives  as 
the  result  of  his  analysis  that  the  portion  of  existing  traffic  which  a 

8 


THE  PANAMA  CANAL  AS  A  BUSINESS  VENTURE 

Panama  Canal  may  possibly  attract  will  require  nine  hundred  and  three 
thousand  and  twenty-nine  net  register  tons  of  steamships. 

The  last  expert  to  be  quoted  is  Professor  Emory  R.  Johnson  of  the 
University  of  Pennsylvania,  the  official  statistician  of  the  Commission. 
The  character  of  Professor  Johnson  as  a  statistician  may  be  seen  from 
the  following  quotation,  taken  from  his  popular  article  in  Everybody's 
Magazine  for  February,  1904. 

"  While  it  is  not  recommended  that  the  Panama  Canal  shall  be  man- 
aged so  as  to  secure  a  large  net  revenue,  our  country  can,  if  it  desires  to 
do  so,  easily  recover  in  a  comparatively  short  time  the  money  invested. 

"  By  spending  on  an  average  $20,000,000.00  a  year  for  the  next  decade, 
the  United  States  will  secure  a  canal  from  whicn,  during  the  succeeding 
twenty  years,  by  means  of  moderate  tolls,  an  income  can  be  obtained 
that  will  meet  current  expenses  and  return  to  our  National  treasury 
the  entire  $200,000,000.00."  He  is  completely  carried  away  with  the 
Suez  Canal  analogy  as  a  basis  for  comparison  with  Panama,  confuses 
"may"  with  "will,"  overlooks  the  uselessness  of  the  canal  for  sailing 
vessels,  and  thus  figures  out  an  available  tributary  tonnage  in  1899  of 
five  million  tons  register;  then  by  figuring  an  increase  of  twenty-five  per 
cent  every  decade,  he  estimates  a  round  seven  million  tons  in  1914, 
apparently  forgetting  that  at  that  time  there  will  be  fourteen  trans- 
continental railroads  in  North  America  and  two  in  South  America,  all 
competing  with  the  canal. 

These  are  the  three  most  careful  estimates  of  the  tonnage  likely  to 
pass  through  the  canal,  when  it  is  opened.  It  now  remains  to  convert 
this  into  dollars  in  order  to  compute  the  gross  income.  The  Suez  Canal 
toll  is  now  $1.70  per  ton  register,  but  in  the  concluding  paragraph  of 
his  report,  Professor  Johnson  speaks  as  follows: 

"In  the  foregoing  discussion  a  toll  of  one  dollar  a  ton  net  has  been 
made  the  basis  of  reasoning  because  that  represents  a  maximum  beyond 
which  the  charge  ought  not  to  go.  A  tariff  much  higher  than  that  would 
in  all  probability  so  restrict  the  tonnage  passing  through  the  canal  as 
to  reduce  the  revenue  derived  from  the  tolls." 

On  the  basis  of  one  dollar  a  ton  then,  according  to  the  estimates  already 
mentioned,  the  annual  payments  at  first  from  canal  tolls,  according  to 
these  estimates  of  probable  tonnage  will  respectively  be  $400,000.00, 
$900,000.00  and  $7,000,000.00,  according  to  Professor  Johnson.  - 

In  order  to  get  the  net  income,  we  must  substract  from  these  sums 
the  annual  cost  of  maintenance  and  operation  of  the  canal.  On  page 
256  of  the  report  of  the  Walker  Commission  this  cost  is  given  as 
$2,000,000.00.  On  page  97  of  the  Report  of  the  Board  of  Consulting 
Engineers  it  is  given  as  $2,000,000.00.  F.  C.  Penfield,  in  his  "East  of 
Suez,"  page  23,  says  that  it  can  not  be  less  than  $4,000,000.00  annually. 
Let  us  assume  the  minimum  cost  of  maintenance  and  operation  as 

9 


THE  PANAMA  CANAL  AS  A  BUSINESS  VENTURE 

$2,000,000.00  per  year,  and  the  maximum  as  $4,000,000.00.  On  such  a 
basis,  if  Mr.  Nimmo's  estimate  of  tonnage  proves  true,  the  minimum 
annual  deficit  on  this  score  will  be  $1,600,000.00  and  the  maximum  will 
be  $3,600,000.00.  If  Colonel  Church  proves  to  be  the  true  prophet,  the 
minimum  and  maximum  deficits  to  be  made  up  from  the  United  States 
Treasury  on  maintenance  and  operation  account  will  be  respectively, 
$1,100,000.00  and  $3,100,000.00.  If  Professor  Johnson's  estimates 
come  true,  then  there  will  be  a  profit  of  $3,000,000.00  and  $5,000,000.00 
respectively  to  be  devoted  to  paying  off  the  principal  and  interest  of  the 
enormous  canal  debt. 

Ill 

What  will  be  the  fixed  charge  upon  the  United  States  Treasury  from 
1920  if  the  canal  be  opened  for  traffic  in  that  year,  and  from  that  time  the 
outstanding  canal  bonds  be  redeemed  in  thirty  yearly  instalments? 

In  endeavoring  to  answer  this  question,  it  will  be  assumed  for  the  sake 
of  argument  that  from  1920  the  income  from  tolls  will  always  equal  the 
cost  of  maintenance  and  operation,  although,  according  to  the  estimates 
of  traffic  by  Mr.  Nimmo  and  Colonel  Church,  there  is  sure  to  be  a  large 
deficit.  The  chief  remaining  variable  in  our  problem  then  is  the 
amount  of  actual  outlay  by  the  United  States,  when  the  canal  opens  for 
traffic  in  1920.  What  are  its  minimum  and  maximum  limits  according 
to  the  results  of  the  previous  computations  ? 

According  to  our  first  method  of  computation,  viz.,  figuring  principal 
and  compound  interest  on  twelve  yearly  instalments  of  expenditure  of 
$30,000,000.00  in  addition  to  the  amount  already  expended,  the  proba- 
ble cost  was  found  to  be  about  $600,000,000.00. 

The  second  estimate  was  based  on  the  supposition  that  twenty  per 
cent  of  the  material  to  be  moved  and  placed  had  been  so  treated,  and 
that  the  cost  of  the  remaining  eighty  per  cent  of  the  work  to  be  done 
would  be  on  the  same  basis.  By  this  method  of  computation  the  mini- 
mum and  maximum  results  were  half  a  billion  of  dollars  and  one  and  a 
half  billion  of  dollars. 

Now  in  estimating  the  fixed  charge  upon  the  treasury,  beginning  in 
1920,  it  is  to  be  noted  that  while  the  instalment  for  repayment  of  the 
principal  each  year  will  be  constant,  viz.,  one  thirtieth  of  the  total  canal 
debt,  the  charge  for  the  payment  of  interest  will  lessen  each  year  until 
the  extinction  of  the  debt,  by  the  amount  which  forms  the  interest  at 
two  per  cent  on  the  one-thirtieth  of  the  principal  paid  off  each  year. 

If  the  cost  shall  be  $600,000,000.00,  the  annual  payment  on  principal 
account  will  be  $20,000,000.00,  while  the  annual  decrease  in  amount 
of  interest  to  be  paid  will  be  $400,000.00. 

If  the  cost  shall  be  $1,500,000.00,  the  annual  payment  on  principal 

10 


THE  PANAMA  CANAL  AS  A  BUSINESS  VENTURE 

account  will  be  $50,000,000.00,  while  the  annual  decrement  will  be 
$1,000,000.00. 

This  supposition  of  the  probable  charge  upon  the  treasury  presupposes 
that  the  total  cost  of  the  canal  will  be  represented  by  bond  issues.  Up 
to  the  present  time  part  has  come  from  surplus  revenue  and  part  from 
bond  issues.  It  all  comes  out  of  the  taxpayers  of  the  United  States. 
Where  the  appropriation  is  from  surplus  revenue  the  money  is  taken 
from  the  pockets  of  the  present  generation;  if  it  comes  from  bonds  it 
will  largely  come  from  the  pockets  of  the  next  generation. 

IV 

What  will  be  the  economic  benefit  in  the  lowering  of  the  cost  of  trans- 
portation of  low-grade  freight,  such  as  cereals,  ores,  metals,  sugar,  grain 
and  lumber,  between  the  Atlantic  and  Pacific,  through  the  canal,  as  com- 
pared with  the  cost  via  the  Panama  Railroad,  equipped  throughout  in 
the  best  possible  way  and  furnished  with  the  best  possible  terminal  facil- 
ities, like  the  Tehuantepec  Railroad  across  Mexico? 

Before  attempting  to  answer  this  question  three  facts  are  to  be  noted ; 
first,  so  far  as  passenger  traffic  is  concerned  the  canal  will  be  a  hin- 
drance and  not  a  benefit.  After  it  is  completed  it  will  take  consider- 
ably longer  for  passengers  to  cross  the  Isthmus  than  it  does  now.  The 
completion  of  the  lock  canal  will  wipe  out  the  railroad  in  many  places 
because  of  the  broad  lakes  which  will  be  created.  It  has  become  neces- 
sary to  build  a  new  line  around  the  lakes.  This  will  make  the  time  of 
transit  considerably  longer  than  it  is  now.  It  will  take  steamers  from 
twelve  to  twenty-four  hours  to  pass  between  the  two  oceans. 

Second,  there  is  very  likely  to  be  a  considerable  transhipment  of 
freight  at  the  Atlantic  terminus  in  any  event  when  the  canal  is  complete. 

It  is  a  well-known  fact  that  the  commerce  on  the  Atlantic  Ocean 
which  calls  for  steamships  to  carry  freight  is  far  greater  than  on  the 
Pacific  coast  of  America,  while  the  great  commercial  ports  are  more 
numerous  and  nearer  together  on  the  east  coast  than  on  the  west  coast 
of  the  continent.  Any  owner  of  a  steamship  reaching  Colon  with  a 
half  cargo,  without  me  certainty  of  a  return  cargo  from  the  Pacific 
coast,  will  hesitate  to  go  through  the  canal.  He  will  realize  the  much 
greater  opportunity  of  getting  a  charter  or  cargo  on  the  Atlantic  than 
on  the  Pacific,  with  New  Orleans  or  Galveston  not  far  away,  while 
if  he  goes  through,  his  ship  if  he  returns  to  the  Atlantic  must  pay  tolls 
twice  on  its  carrying  capacity,  with  or  without  cargo.  It  seems  prob- 
able therefore  that  when  the  canal  is  built,  a  considerable  amount  of 
freight  will  break  bulk  at  either  end,  much  of  which  will  be  carried 
across  by  railroad. 

The  third  thing  to  be  remembered  is  that  the  tolls  paid  by  the  ship's 
owner  are  transferred  as  a  freight  charge  to  be  paid  ultimately  to  a 

11 


THE  PANAMA  CANAL  AS  A  BUSINESS  VENTURE 

large  degree  by  the  shipper.  If  there  is  only  a  half  cargo  on  board, 
that  charge  will  unquestionably  be  increased  to  a  considerable  degree, 
for  otherwise  the  ship  owner  will  be  out  of  pocket,  inasmuch  as  he 
will  have  to  pay  tolls  on  the  freight-carrying  capacity  of  his  vessel. 

Many  of  the  articles  attempting  to  show  the  commercial  value  and 
economic  benefit  of  the  canal  are  misleading  and  unsound,  because 
they  are  founded  on  the  enormous  saving  of  distance  between  the 
voyage  around  the  Horn  and  through  the  canal.  The  elaborate  tables 
of  distance  via  the  Canal  and  Magellan  routes,  in  order  to  justify  the 
expenditure  by  the  United  States,  compiled  by  the  official  statistician, 
Professor  Johnson,  are  somewhat  ludicrous  and  academic,  and  have 
no  practical  value.  They  tacitly  ignore  the  fact  that  freight  can  be 
transhipped  at  Colon,  on  the  Atlantic,  carried  fifty  miles  by  railroad, 
and  at  Panama  loaded  again  into  a  steamer  floating  on  the  Pacific 
Ocean.  The  question  at  issue  is  not  how  much  shorter  to  Pacific 
ports  will  the  voyage  of  a  steamer  be  through  the  canal  as  compared 
with  round  the  Horn.  The  real  question  is  what  will  be  the  saving 
in  the  cost  of  carrying  freight  from  the  Atlantic  to  the  Pacific  Ocean 
between  two  methods.  One  is  to  carry  it  in  the  hold  of  a  ship  through 
the  completed  canal,  built  at  the  cost  of  the  United  States  Treasury 
for  an  enormous  sum.  The  other  is  to  transfer  it  from  a  ship's  hold 
to  a  railroad  car  at  Colon,  carry  it  across  the  Isthmus  and  re-transfer 
to  a  ship's  hold  at  Panama.  This  view  of  the  case  is  made  all  the  more 
emphatic  by  the  opening  of  the  Tehuantepec  Railroad,  which  now 
transports  the  sugar  of  the  American-Hawaiian  Company  formerly 
carried  by  steamers  around  South  America.  The  former  prejudice 
against  breaking  bulk  between  shipping  point  and  point  of  destina- 
tion, in  the  delivery  of  freight,  is  out  of  date.  As  long  as  consign- 
ments are  delivered  in  good  order,  shippers  will  not  be  disposed  to  ask 
whether  there  was  any  transhipment  in  the  course  of  the  voyage  or  not. 

The  problem  now  remains  for  us  to  determine  the  cost  of  trans- 
portation of  freight  between  the  two  oceans  by  the  two  methods  which 
nave  just  been  described.  Through  the  canal  the  cost  will  be  deter- 
mined by  the  amount  of  tolls  levied  on  the  freight-carrying  capacity 
of  the  steamer.  On  the  Suez  Canal  the  tolls  amount  to  a  little  over 
$2.00  per  ton  net  register  according  to  British  measurements,  which 
are  the  same  as  American.  Let  us  assume  $1.00  and  $1.50  per  net 
registered  ton  as  the  toll  to  be  charged  on  the  Panama  Canal.  Accord- 
ing to  statistical  experts  the  ordinary  freight  steamer,  when  fully  loaded, 
will  carry  about  two  tons  of  cargo  to  each  ton  of  net  register.  This 
will  make  the  extra  cost  for  passing  through  the  canal  of  each  cargo 
ton  in  a  fully  laden  ship  fifty  or  seventy-five  cents,  and  in  a  partly 
loaded  ship,  if  the  full  incidence  of  the  toll  falls  upon  the  shipper,  a 
somewhat  larger  amount,  possibly  reaching  a  dollar  a  ton. 

12 


With  this  cost  of  transportation  through  the  canal  we  have  now  to 
compare  the  cost  of  transfer  from  ship's  hold  to  ship's  hold  across 
the  Isthmus  by  railroad.  This  divides  into  two  parts,  viz.,  the  cost  of 
carriage  on  the  railroad  and  the  cost  of  handling  at  either  terminus. 
At  the  loading  port,  in  the  case  of  coal  and  ores,  where  the  tracks  are 
elevated,  as  at  the  ore  docks  in  Marquette  and  many  other  places,  grav- 
itation can  be  utilized  and  the  cost  of  handling  is  very  slight. 

Mr.  J.  J.  Hill,  in  an  address  before  the  Chicago  Commercial  Asso- 
ciation, said  that  the  average  freight  cost  of  moving  a  ton  one  mile  is 
.787  cents  for  the  whole  United  States,  and  this  seems  to  be  a  generally 
accepted  estimate  among  economists.  On  this  basis  the  cost  of  trans- 
portation over  the  Panama  railroad,  which  is  fifty  miles  long,  would 
te  about  forty  cents.  Let  us  call  it  fifty  or  a  cent  a  mile.  Mr.  Bates, 
who  is  doing  the  great  engineering  work  of  raising  Galveston  above 
the  sea,  says  that  a  reasonable  charge  for  handling  freight  at  both 
ends  would  be  thirty-five  cents  a  ton,  provided  the  best  machinery 
were  used.  He  says  that  at  Galveston  the  charge  is  about  thirteen 
cents  a  ton.  Allowing  for  error,  let  us  call  it  thirty  cents  a  ton  for  hand- 
ling at  both  termini.  This  makes  a  total  charge  of  eighty  cents  to  a 
dollar  per  ton  for  the  cost  of  carrying  across  the  Isthmus  from  ship's 
hold  to  ship's  hold. 

This  estimate  would  seem  not  to  be  far  from  the  truth,  if  the  state- 
ments by  Mr.  John  F.  Wallace  about  the  Tehuantepec  Railroad,  in  a 
public  speech,  are  sound.  He  said:  "Modern  methods  and  machinery 
will  enable  this  railroad,  one  hundred  and  seventy  miles  in  length, 
to  conduct  a  profitable  business  at  a  rate  not  to  exceed  two  dollars 
per  ton  from  ship  hold  to  ship  hold."  The  grades  on  the  Panama 
railroad  are  much  lower  than  on  the  Mexican  road,  and  as  it  is  less 
than  one-third  as  long,  a  flat  rate  of  eighty  cents  per  ton  would  seem 
to  be  profitable  for  the  United  States.  On  this  point  Mr.  Wallace 
wisely  says: 

"If  you  are  building  the  canal  for  the  sake  of  giving  the  business 
world  cheaper  freights,  why  not  confer  these  benefits  as  soon  as  possible, 
through  the  railroad  ?  In  a  year  you  can  give  them,  by  properly  per- 
fecting the  railroad,  the  benefits  of  rates  as  low  as  the  canal  could 
possibly  make,  to  fully  half  as  much  traffic  as  the  canal  would  get." 

This  is  admirable  advice,  only  it  does  not  go  far  enough.  If  as  low 
rates  can  be  obtained  by  spending  five  million  dollars  as  by  spending 
from  five  hundred  millions  upward,  why  dig  the  canal  at  all  ? 

If  then  the  cost  of  freight  by  ton  through  the  canal  will  be  from 
fifty  to  seventy-five  cents  a  ton,  and  the  entire  cost  by  railroad  will  be 
eignty  cents,  or  a  dollar,  it  is  clear  that  the  economic  benefit  to  result 
from  this  enormous  expenditure  will  be  a  reduction  of  not  more  than 
fifty  to  seventy-five  cents  a  ton  on  a  portion  of  the  freight  carried  both 

18 


THE  PANAMA  CANAL  AS  A  BUSINESS  VENTURE 

ways  between  the  Pacific  coast  of  America  and  the  countries  washed 
by  the  Atlantic  Ocean. 

There  are  two  interesting  questions  connected  with  this  portion  of 
the  investigation  which  I  will  only  state  and  not  discuss  in  full.  The 
first  is,  How  much  freight  between  Europe  on  the  one  hand  and  the 
Orient  and  the  Pacific  coast  of  the  United  States  on  the  other,  now 
passing  across  the  trans-continental  railroads,  will  be  diverted  to  an 
all  sea  route  by  foreign  vessels  ?  The  second  is  as  follows,  viz.,  What 
portion  of  the  United  States  east  of  the  Rocky  Mountains  will  get  any 
direct  benefit  in  the  lowering  of  freight  rates  by  the  canal,  for  the  freight 
which  it  may  send  to  or  receive  from  the  Pacific  coast  and  the  Orient  ? 

A  partial  answer  to  these  questions  has  been  given  by  Professor 
Albert  Bushnell  Hart  of  Harvard  University,  an  answer  all  the  more 
significant  because  he  is  a  champion  of  the  canal  and  a  defender  of 
President  Roosevelt's  diplomacy  in  seizing  the  Isthmus  by  force  in  1903. 

In  discussing  the  commercial  future  of  the  chief  Pacific  seaports  of 
the  United  States,  he  says: 

"The  one  disturbing  influence  which  nobody  as  yet  can  calculate  is 
the  probable  diversion  of  traffic  from  all  the  Pacific  ports  when  the 
Panama  Canal  is  finished,  but  what  is  lost  in  the  proportion  of  foreign 
trade  will  doubtless  be  made  up  by  traffic  from  the  East  to  the  West 
of  America,  and  shipments  destined  for  the  Orient  from  all  parts  of 
the  United  States  west  of  Pennsylvania  and  north  of  Kentucky  and 
Missouri  can  afford  to  pay  trans-continental  rates  rather  than  go  through 
the  Isthmus." 

It  is  time  now  to  summarize  the  results  of  this  investigation  in  as 
brief  a  form  as  possible. 

(1)  The  cost  of  the  canal  is  very  likely  to  approach  half  a  billion  dol- 
lars, and  may,  if  carried  through,  amount  to  one  and  a  half  billion  of 
dollars. 

(2)  As  to  income  from  tolls,  two  of  the  experts  figure  out  results  which 
involve,  at  the  opening  of  the  canal  in  1920,  a  dencit  on  account  of  main- 
tenance and  operation  of  from  one  to  three  million  dollars.     According 
to  the  third  expert,  there  will  be  a  profit  of  three  to  five  millions,  while  the 
annual  charge  upon  the  United  States  treasury  will  be,  at  the  lowest,  ten 
millions. 

(3)  Beginning  with  1920,  under  the  conditions  of  payment  of  debt 
assumed,  the  fixed  charge  or  drain  on  the  National  treasury  each  year 
for  thirty  years  will  be  from  twenty  millions  to  fifty  millions  a  year,  plus 
a  constantly  decreasing  interest  account. 

(4)  As  to  the  economic  benefit  to  be  derived  from  the  building  of  the 
canal  in  the  lowering  of  freight  rates,  it  is  not  likely  to  exceed  more  than 
seventy-five  cents  a  ton  to  individual  shippers,  and  the  gain  may  be  con- 
siderably less  than  that  amount. 

14 


THE  PANAMA  CANAL  AS  A  BUSINESS  VENTURE 

In  conclusion  it  may  be  properly  asked,  What  does  the  building 
of  the  Panama  Canal  by  the  United  States  mean  to  the  citizens  of  the 
country  ? 

The  proper  answer  would  seem  to  be  as  follows.  An  enormous 
sum,  probably  amounting  to  at  least  one  half  a  billion  of  dollars,  is  to 
be  taKen  from  the  pockets  of  two  generations  of  taxpayers,  in  order 
to  confer  a  slight  benefit  on  the  shippers  of  merchandise  between 
the  Atlantic  and  Pacific  Oceans. 

If  this  investigation  has  been  conducted  on  a  sound  basis,  and  its 
conclusions  are  approximately  correct,  there  would  seem  to  be  a  modicum 
of  truth  in  the  statement  made  by  Mr.  Samuel  Hill  of  Seattle,  Wash., 
and  Washington,  D.  C.,  at  Lincoln,  Neb.,  in  May,  1907,  when  in  a 
public  lecture  he  said  that  the  building  of  the  Panama  Canal  by  the 
United  States  was  the  "monumental  folly  of  the  age." 


15 


